Is Bihar witnessing a manufacturing resurgence?

The high share of young enterprises in states such as Bihar signals industrial decline, not manufacturing resurgence

According to some economists, the key reason why a high share of young manufacturing firms has not translated into higher manufacturing output is the decline of older but larger firms in some of these states. Photo: Priyanka Parashar/Mint

The recent report on ease of doing business in India published jointly by the Niti Aayog and the Mumbai-based IDFC Institute had one striking finding: In some of India’s poorest states such as Bihar, Tripura and Jharkhand, the share of young manufacturing firms is much higher than average.

The results were based on an enterprise survey of 3,276 manufacturing enterprises conducted by the IDFC Institute based on a sampling frame drawn from the Annual Survey of Industries. Firms set up less than 10 years ago were classified as young enterprises.

As the chart below shows, several poorer states of the country have a high share of young enterprises. Bihar and Uttarakhand lead the charts with the share of young enterprises in these states being as high as 80% and 73%, respectively.

The report argues that the high share of young enterprises in these states is “indicative of accelerated manufacturing activity in recent years”, adding the caveat that manufacturing activity in these states may also have risen partly because of the low base.

However, an analysis of state-wise manufacturing growth figures over the past decade does not suggest that states with a high share of young enterprises are leading a manufacturing resurgence in the country. In fact, there is no correlation between the share of enterprises set up over the past decade, and manufacturing growth in these states over the past decade, as the chart below illustrates.

According to some economists, the key reason why a high share of young manufacturing firms has not translated into higher manufacturing output is the decline of older but larger firms in some of these states. For states such as Uttarakhand and Sikkim, the increase in manufacturing activity could be driven largely by tax exemptions.

“In several states such as Bihar, large enterprises have declined which has led to an increase in share of young enterprises. Thus it (the share of young enterprises) does not tell us much about the state’s manufacturing sector,” said Ravi Shrivastava, a professor of economics at the Centre for the Study of Regional Development, Jawaharlal Nehru University.

Other data culled from the enterprise survey also points to similar conclusions. Thirty-two percent of all young enterprises have less than 10 workers. Among older firms, the proportion of firms having less than 10 workers is lower at 22%. This suggests that young enterprises are likely to be smaller than the ones they are replacing. This helps explain why manufacturing output has not kept pace with the growth of new enterprises across states.

To be sure, the problem of shrinking enterprise size is not limited to Bihar alone. Over the past three decades, the average number of workers employed in an Indian factory has declined even as the country’s growth engine picked up pace during this period. But the problem of shrinking factories is most acute in states such as Bihar and West Bengal, as an earlier Plain Facts column pointed out.

The collective weight of the evidence suggests that the high share of young enterprises in states such as Bihar and Jharkhand does not signal a manufacturing resurgence in these states. Rather it points to the weaknesses in India’s manufacturing sector that have led to the collapse of a sizeable number of large manufacturing units.